https://archive.freecapitalists.org:443/forums/5.aspxenCommunityServer 2008.5 SP2 (Build: 40407.4157)https://archive.freecapitalists.org:443/forums/thread/222748.aspxMon, 15 Jun 2009 16:01:03 GMT944abf2b-d1be-4bf2-990d-438cb0e377e9:222748curious0https://archive.freecapitalists.org:443/forums/thread/222748.aspxhttps://archive.freecapitalists.org:443/forums/commentrss.aspx?SectionID=5&PostID=222748<p>I was reading a book and other materials on bond investing. The writers all explained the effect of&nbsp; the &quot;prevailing interest rate&quot; or simply &quot;interest rate&quot; on an existent bond&#39;s price as if the &quot;prevailing interest rate&quot; is really known. </p> <p>I figured out that the bond&#39;s current price is calculated as follows:</p> <p>a=c/g+(p-c/g)/(1+g)^n<br />where<br />a: price (or expected price)<br />c: coupon = par * original_interest_rate_at_issue<br />g: prevailing interest rate (or yield to maturity, or internal rate of return)<br />n: years to maturity<br />p: par value</p> <p>To illustrate the above formula, here is an example:</p> <p>prevailing interest rate: &nbsp;&nbsp; 0.065<br />original interest rate (current yield) at issue: &nbsp; 0.07<br />coupon: &nbsp;&nbsp; 70<br />par: &nbsp;&nbsp; 1000<br />year to maturity: &nbsp;&nbsp; 30<br />current expected price: &nbsp;&nbsp; 1065.29338<br />price change: &nbsp;&nbsp; 6.5%</p> <p>But is the &quot;prevailing interest rate&quot; really known? If so, what is it called in daily language (e.g., 10-year treasury note yield at issue, or 30-year treasury note yield at issue?)</p> <p>That question is perplexing me.</p> <p>My guess is that it is not known. All the authors were talking about it as if it is known.</p> <p>Please educate me. Thanks!</p><div style="clear:both;"></div>